Monday, September 5, 2011

European stocks down big

I wasn't going to have a post today after all today is Labor Day here in America but I woke up to see panic across Europe. It seems markets are concerned about Europe's debt crisis worsening after German chancellor Angela Merkel lost some elections in her home state. Merkel has supported a conditional bailout of insolvent countries in the EU which has made her unpopular back at home where the German people want nothing to do with bailing out anybody. Germany is the only country with enough money to bailout other countries like Greece. If the European bailout loses Germany's support, all hell is going to break loose in Europe, including perhaps the demise of the Euro as a common currency and a breakup of the European Union.

Here is a chart of the German stock market over the past 6 months or so.

The German stock market is down over 35% from its highs.

The German DAX is down 5.5% as I type this at 7:25 AM Pacific Time. The London FTSE is down 3.5%. Asian markets all closed in the red as well by more than 2% and US Dow Jones stock futures are lower by more than 250 pts. Gold is revving up once again up 21 dollars to 1897 and change. Oil is down 2.5%.

"It's stating the obvious that many European banks would not survive having to revalue sovereign debt held on the banking book at market levels," he said.

In other words, it's either bailout or death for the banks. This would perhaps set the dominoes falling across the financial system worldwide leading to the destruction of the system as we know it today. I hate to sound melodramatic but there is potential here for catastrophe. One bank in the US(Lehman Brothers) almost brought down the system in 2008, if European banks start failing, look out!!

Former German chancellor Gerhard Schroeder is calling for the creation of a United States of Europe to solve the European Debt Crisis. He said it will take time but that “...to solve the crisis today, you have to realize that having a common currency, you can’t only have a coordinated money policy. You must have also a coordinated fiscal, social and economic policy,” said Schroeder.

Europeans, what do you think about that? How would you like to have a United States of Europe with a federal government like the US?

I contemplated shorting Europe last week with EFZ, an exchange traded fund that moves inversely with European stock prices but felt I missed my opportunity the last few days. I think I will put that trade back on Tuesday as it definitely looks like Europe is going down. We could be looking at a repeat of September of 2008 when the shit hit the fan when Lehman Brothers failed and US stocks dropped precipitously. With no appetite for bailouts anywhere anymore, markets are going to have to let the chips fall where they may which could mean a worldwide depression with European stocks dropping 50% or more from here.